The first question Tim Cook faced at the Goldman Sachs Conference: Apple's massive pile of cash, what it planned to do with it and what Cook thinks of David Einhorn's Greenlight Capital lawsuit over Apple's upcoming proposal in now in front of shareholders.

Update: Apple has filed a transcript of CEO Tim Cook's comments regarding the Einhorn case with the U.S. Securities and Exchange Commission. See embedded document below.

There's no "Depression Era" mentality at Apple

"You really want to get started!" Cook joked before starting his defense of Apple's investment strategy against accusations by Einhorn that the company maintains a "Depression Era" mentality that's causing it to irrationally hoard money rather than investing it sensibly.

"If you look at what we've done in terms of investment, last year we invested $10 billion in CapEx. We think we're gonna do a similar amount this year. We're investing in retail around the world, in product innovation, in new product, in supply chain. We're acquiring some companies.

"My definition of a Depression Era mentality wouldn't be of a company investing a pair of tens over two years. To add to that fact, we're returning $45 billion to shareholders through a combination of dividends and buybacks. I don't know how a mentality with a depression-era mindset would have done all those things."It's an incredible privilege where we can seriously consider returning additional cash to our shareholders. The management team and the board are in very active discussions. That's what our shareholders want."

"Now, we do have a lot of cash," Cook added. "Last quarter alone the cash flow from operations was over $23 billion. It's an incredible privilege where we can seriously consider returning additional cash to our shareholders. The management team and the board are in very active discussions. That's what our shareholders want."

Referring to the Einhorn proposal to issue preferred stock to accelerate disbursements of dividends to shareholders, Cook specifically said, ""I think it's creative. We are going to thoroughly evaluate their proposal."

However, Cook noted that "the disagreement centers around a proposal on Apple's proxy, which we filed back in December. It's about the rights of shareholders. It's not about whether Apple returns additional cash to shareholders, it's not about how much cash to return to shareholders, it's not about any of those things."

Fight over Prop 2 is "a silly sideshow"

Referred to as "Prop 2," the shareholder proposal would erase the ability of Apple's board members to issue preferred stock without getting the approval of shareholders.

"We thought we should eliminate a blank check preferred from Apple's charter," Cook said, part of an effort to improve governance within the company.

If Prop 2 passes at the shareholder meeting scheduled at the end of February, and if Apple subsequently decided to issue preferred stock as part of its cash distribution plan, it would simply need its shareholders to vote on the matter.

However, worried that Apple's Prop 2 vote would block all potential for the Einhorn proposal, its backers have filed suit, calling into question the legality of the proposal because it bundles a variety of governance-related issues into a single vote."This is a waste of shareholder money, it's a distraction, and it's not a seminal issue for Apple."

"I find it bizarre we find ourselves being sued for doing something that's good for shareholders," Cook said of the lawsuit. "It's a silly sideshow, honestly."

He added, "I think it would be a lot better use of funds to donate that time and money to a worthy cause. You're not gonna see us do [shareholder] campaign mailing, you're not gonna see a "yes on 2" in my front yard. This is a waste of shareholder money, it's a distraction, and it's not a seminal issue for Apple."

"The serious issue on hand is the return of cash: how to do it, how much to do, and we're very serious about that. But this Prop 2 thing is a silly sideshow. We feel so strongly for Apple that shareholders should approve any issuance of preferred stock."

@quadra610, I agree. After all it's Apple's cash not investors. Apple made this money by selling products not by receiving money from investors. I wonder if any investor money is actually available to Apple. I can see IPO money going to a new company but after that I doubt any investment money is even used. The stock market is simply a casino and the money never leaves it.

Originally Posted by haar
how about returning cash to the customers... in the form of prices that have the iPad at 100 dollars cheaper?... or a mac mini for 400 dollars that is better than 80% of the desktops sold?

Making less money ≠ returning cash.

They can't keep up with demand at current prices. They CAN'T lower them.

@quadra610, I agree. After all it's Apple's cash not investors. Apple made this money by selling products not by receiving money from investors. I wonder if any investor money is actually available to Apple. I can see IPO money going to a new company but after that I doubt any investment money is even used. The stock market is simply a casino and the money never leaves it.

Why does an investor buy a stock or agree to give a company money in an IPO? Is it because they like gambling? No, they want a claim on future cash generated by that company. At its essence, that's what a stock is, whether bought in a primary or secondary stock transaction. As a stockholder, you are an owner of the company. If 100% of Apple's shareholders decided they wanted to liquidate the company and sell off its assets, they could. In the long run, the cash belongs to a company's owners, not the company or company management.

A secondary market for a company's stock is potentially very important for a company's future growth. Apple can issue new shares to acquire another company, to fund internal capital investments, or take out debt. In dire circumstances, a company can issue stock to fend off potential bankruptcy. Look at what an MLP is and you'll see how important having a liquid, well-traded secondary market for stock is. They actively access the secondary equity market to expand the US's energy production and infrastructure. Without the stock market, we wouldn't likely be experiencing the current energy boom in the US right now.

Apple's management has done a great job growing the company organically. That doesn't mean that, 20 years from now, they couldn't and may need to benefit from a healthy company stock price.

how about returning cash to the customers... in the form of prices that have the iPad at 100 dollars cheaper?... or a mac mini for 400 dollars that is better than 80% of the desktops sold?

No. If they did that, they would be giving up their profits, and possibly dipping into losses. People don't understand the way companies work, or how pricing is determined. What you are saying would propel Apple into the ranks of Dell and HP. Is that what you really want?

I'm sure people have noticed how much Apple's stock has dropped today after having risen nicely for several days. The Prop 2 discussion was mostly responsible, though other things said added to it.

It may seem strange to some that giving shareholders more power in some areas, which is just what is being demanded by various shareholder responsibility groups, is a question that's being debated. But we have to think of what people like Einhorn really want. What they want is not allowing shareholders to have a vote on these issues, but to have management respond directly to their own demands, when they make them, in what they think of as being a positive manner for them.

Prop 2 would take this issue away from management, and give it to the shareholders to vote upon. As any sort of special shares have little or no value to the vast majority of shareholders, and could possibly put them in a worse position, it would be more likely to be voted down than it would if the board made the decision directly. It's Apple's way of making the prop more difficult to achieve. Large scale investors understand this, and so the stock dropped. They were expecting a more positive statement on preferred shares, and they didn't get it. As large investors care little about the average shareholder, and how Prop 2 would be better for them, the stock dropped.

Creid1987 is on track here. The comment from rob53: "After all it's Apple's cash not investors." is not entirely inaccurate. Apple, as with any public company, is owned by its shareholders. Apple shareholders collectively own all of the assets, liabilities and equity the company amasses throughout the course of doing business. The significant pile of excess cash it has accrued through selling devices is Apple's, which means it belongs to whatever entity owns Apple (the shareholders). When a company decides to go public it is making a choice to have access to a different capital (funding) pool then if it stayed private. Apple, a long time ago, decided that being public owned by shareholders would provide it the best competitive platform to take on its formidable and well-capitalized competitors (i.e. Microsoft & IBM). If this company were privately owned (like what Dell may soon become) we could still be having a discussion about the excess pile of cash sitting on the balance sheet, but only if we had access to that information, which we probably wouldn't since private companies don't have to share that info with interested bystanders (like me).